The Biden administration is likely to dramatically change its approach to tax policy, with the first step in the stimulus package it began pushing through Congress this month.
The House Ways and Means Committee marked up the tax portions of the package during a hearing last week. If the package passes intact in the House and the Senate, it would include Economic Impact Payments of $1,400 for individuals, expand the Child Tax Credit to $3,000 per child and make it fully refundable, and triple the maximum Earned Income Tax Credit and extend eligibility for workers without children.
The $1.9 trillion COVID-19 relief package represents the Biden administration’s response to the urgent needs of the pandemic and includes a host of other provisions, including the extension of enhanced unemployment benefits that are due to expire at the end of March, as well as an extension of the moratorium against evictions and foreclosures through September. Other policies are already provoking pushback from Republicans and some Democrats, such as an increase in the minimum wage to $15 per hour and aid to state and local governments whose budgets were hit by the pandemic.
There could be more tax changes to come under the Biden administration that could roll back parts of the Tax Cuts and Jobs Act of 2017, and even provisions in last year’s CARES Act like the removal of limitations in the TCJA on carrying back the net operating loss deduction. “I think everything's on the table, and there will probably be a lot of give and take,” said Kathryn Kaminsky, vice chair and tax leader at PricewaterhouseCoopers, which recently issued a
One reason for compromise is that the Senate for now seems to be preserving the legislative filibuster, which requires at least 60 senators to vote for legislation to advance. “The filibuster is going to be a huge variable in the scope and process that any tax legislative activity is going to have,” said Todd Simmens, a former legislation counsel to Congress’s Joint Committee on Taxation and national managing partner of tax risk management at BDO USA. “Right now, I don’t really hear an immediate desire to remove the legislative filibuster, as has been done for court appointments, etc. And I don’t think there are the votes right now to do that.”
The Democrats appear to be ready to use a budget reconciliation strategy, which requires only 51 votes, to push through the relief package, as Republicans did in 2017 with the TCJA and in 2001 with the Bush tax cuts. But President Biden has indicated that he would prefer to work with Republicans on legislation and has held meetings in the Oval Office with some GOP senators in an effort to persuade some moderates to come on board and support the stimulus package.
However, using budget reconciliation means that some of the tax provisions would likely have to expire at some point in the next few years. “The upside is generally you need only 51 votes,” said Simmens. “But the downside, like we had in ’17 and in ’01, is the bill will likely have a shelf life. The problem is you’re not going to have a permanent tax policy.”
Despite the move toward a reconciliation strategy to get the stimulus package passed to meet the urgent economic needs from the pandemic, Democrats seem to recognize the need to work on a bipartisan basis on tax legislation.
“As the new Congress strives to meet this moment, I expect tax policy to remain central to our efforts to recover from the pandemic and accelerate our nation’s economy,” said House Ways and Committee chairman Richard Neal, D-Massachusetts, during an online symposium last week hosted by the Tax Council Policy Institute and Ernst & Young. “Two key features define the present legislative landscape and will shape our potential: the return of unified Democratic government and the urgent need for extensive, broadly shared economic relief. For the first time in 12 years, Democrats will control the White House, the House of Representatives and, with the help of our vice president, will have the tie-breaking vote in the U.S. Senate. While it’s technically a unified government, it’s a pretty fragile unity upheld with very slim margins in the House and the narrowest possible margin in the Senate. While it does offer a more straightforward path for legislation than the past few years, we should not underestimate how difficult the challenges are in front of us. Congress in this context will require compromise and inclusive decision making.”
The Biden proposal would augment the $900 billion stimulus package that Congress passed in December during the final weeks of the Trump administration. The appropriations package provided Economic Impact Payments of $600 for individuals, $1,200 for families, and an extra $300 per child, plus it revived the Paycheck Protection Program and extended a number of tax credits, in some cases permanently.
“What one of the provisions clarified was that businesses forgiven for PPP loans could deduct the regular business expenses that are paid for with the loan proceeds,” said Kaminsky. “People were interested in that, as well as the expansion of the Employee Retention Credit and charitable contribution deduction and the temporary full deduction for business expenses for food and beverages, but they had to be provided by a restaurant. People were also focused on the tax extender package. That renewed for at least 12 months all but a few tax provisions that would have expired on Dec. 31. Some provisions were actually made permanent and others extended for as many as five years. Permanent tax provisions included deductions for certain energy-efficient commercial building expenses and reduced the craft beverages excise tax. The look-through rule for payments related to controlled foreign corporations, the New Markets Tax Credit and the Work Opportunity Tax Credit were extended.”
Some of the possible changes coming under the Biden administration could be an increase in the corporate tax rate from the 21 percent that was supposedly made permanent under the TCJA. While the top rate is not likely to go all the way back up to 35 percent, it could be increased to 28 percent as a way of seeking compromise with Republicans.
Other areas of possible agreement under Biden could be expanding the research tax credit, so that instead of amortizing it over five years under the TCJA rules, it could be deducted the same year, as it used to be prior to the passage of the TCJA.
“He really has a big push for manufacturing domestically, and bringing things back to the United States,” said Simmens. “The research credit is a big part of that. I think there’s an interest in bringing that back to closer to what its form was and how it was set up.”
The Biden administration might also try to increase the long-term capital gains tax rate. “The long-term capital gains rate is 15 or 20 percent, depending on the taxpayer’s profile,” said Simmens. “That could become an issue for qualified opportunity zone investors who are able to defer capital gains when they invest in a qualified opportunity fund. The issue there is if they're deferring gains, when that gain comes to roost, they might be unpleasantly surprised if the rates go up. If President Biden has his way, he would at least remove the preferred rate for those earning a million. He would tax long-term capital gains and dividends, for over a million, at the ordinary rate, which he would raise back up to 39.6 [percent] at the top rate. It’s now at 37.”
The Biden administration is also planning to push for tax incentives for green energy and infrastructure. “After meeting President Biden, it is clear as soon as this round of relief is put in place, we will proceed to a major infrastructure initiative,” said Neal. “We will hope to facilitate, upkeep and provide expansions and good infrastructure safety. Last year, the House passed the Moving Forward Act, which could achieve all of these goals. It included the largest tax expenditure investment in combating climate change in history. This year, we will work closely with President Biden to get an infrastructure bill enacted, including a revived Build America Bonds program, a transformative expansion of the Low-Income Housing Tax Credit, an enhanced New Markets Tax Credits I expect to try to make permanent, and a huge investment in broadband expansion and affordability. Alongside the infrastructure provisions, our green energy initiative calls for further investments in clean energy technologies, expanding federal tax incentives for energy efficiency and renewable energy technologies.”
Businesses will need to keep a close watch on further tax changes coming out of Congress this year and in the years ahead. “The key takeaway for businesses is they really need to review how they could benefit from all the COVID relief measures and the tax extender provisions and really look through them as part of their year-end government funding package,” said Kaminsky. “Stakeholders need to engage with policymakers as more legislation and more relief measures are implemented. You’re seeing what's happening and how it affects their business operations and employees in 2021. I think we’re going to see a lot coming.”
